As the ripples of contagion from the collapse of Silicon Valley Bank and Signature Bank spread out, one European bank is particularly vulnerable. And despite losing over 95% of its market value since 2008, it is still too big to fail.
The shares of Credit Suisse Group AG, the world’s most troubled systemic lender, fell by as much as 15% on Monday (March 13) to another fresh record low, before recovering slightly in the latter hours of trading. They are down a further 4% so far today (12pm CET, March 14). This latest crisis of confidence in global banking has also fuelled a fresh surge in the cost of insuring CS’s bonds against default. The five-year credit default swaps on CS’ debt surged to a new record of 453 basis points on Monday. It was the widest move of 125 European high-grade companies tracked by Bloomberg.
The panic unleashed by the collapses of Silicon Valley Bank and Signature Bank has compounded concerns about Credit Suisse’s ability to restructure its business, attract new client funds (to plug the gaping gap left behind by last year’s historic exodus), revive its investment banking business, and navigate ongoing legal and regulatory challenges. Those concerns were further exacerbated by an admission from the lender on the delayed publication of its annual report on Tuesday that “management did not design and maintain an effective risk assessment process to identify and analyze the risk of material misstatements in its financial statements.”
This comes on the heels of news last week that the Swiss lender had delayed the publication of its 2022 annual report after a “late call” on Wednesday evening from the US Securities and Exchange Commission. That call was apparently “in relation to certain open SEC comments about the technical assessment of previously disclosed revisions to the consolidated cash flow statements in the years ended December 31,2020 and 2019, as well as related controls.” None of this, of course, is confidence-inspiring.
Middle Eastern Connection
Most European banking shares have taken a beating since Friday but few as badly as Credit Suisse. One rare exception was Germany’s perennially embattled Commerzbank, which ended Monday 12% lower. But today Commerzbank, unlike CS, is in the green, albeit marginally. CS’ shares are now down 26% year to date, having fallen 67% last year.
For banks, a sharp fall in the value of shares is important since equity, along with disclosed reserves and certain other assets, make up their tier-one capital. Since barely surviving the last financial crisis without a public bailout, Credit Suisse’s stock has been in a death spiral, having lost over 95% of its value since 2007. The bank’s shareholders have already poured around $16.5 billion of additional capital into the lender since 2015, including the $4.3 billion of fresh capital raise in October. That is almost double its current market value ($9.41 billion).
As part of the most recent rights issue, the House of Saud-controlled Saudi National Bank (SNB) bought a 9.9% stake, making it Credit Suisse’s new largest shareholder. It also marked a further increase in Middle Eastern influence over the bank. Before SNB’s investment, Olayan Group (4,9%) and Qatar Investment Authority (5%) already had stakes in the lender.
NC regular Colonel Smithers previously posited that the Kingdom may be trying to replicate what UBS did for Singapore, by partnering with local firms, training locals and setting up wealth management systems. But SNB’s shareholders are already paying a high price for the investment. Since disclosing its interest in taking a stake in CS in October, SNB’s shares have fallen by roughly a third.
“Large Outflows from Wealth Management”
Just days before Silicon Valley Bank collapsed, CS’s one-time largest shareholder, Harris Associates, announced it had sold all of its holdings in the lender. In August 2022, the Chicago-based firm held 10.1% of all Credit Suisse shares but has been cutting back its exposure as the scale of CS’ troubles became apparent.
“There is a question about the future of the franchise,” Harris deputy chairman David Herro told the FT. “There have been large outflows from wealth management.”
Since the beginning of last year, Credit Suisse has been suffering a gathering run on its deposits. In total, customers pulled CHF111 billion ($121 billion) from the lender — a significant sum of money even for a TBTF lender! As Reuters reported in February, attempts by the bank’s management to obfuscate this fact has further eroded investor faith in the lender….
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